Pension bondholders support San Bernardino bankruptcy filing

SAN BERNARDINO - The city's second-largest group of creditors have added their guns to the city's bankruptcy battle as an ally for now, pitting them against CalPERS and the San Bernardino Public Employee Association.

Pension obligation bond holders - investors who collectively own more than $100 million in bonds the city issued in 2005 to re-fund its obligations to the California Public Employee Retirement System - filed the document with U.S. Bankruptcy Court in Riverside on Friday.

It rebuts most of the points CalPERS and SBPEA made in their objections to the city's bankruptcy filing, saying the city's Chapter 9 bankruptcy petition should be allowed to move forward quickly.

This is good news, said the city's bankruptcy attorney, Paul Glassman of Stradling Yocca Carlson & Rauth.

"We're always happy when a major (creditor) decides to file in our support," said Glassman, whose firm filed an argument making many of the same points in court earlier Friday.

Bondholders were initially skeptical of the city's case, going so far as to object to an earlier motion by the city, write attorneys representing the banking firms Ambac Assurance Co., Erste Europ ische Pfandbrief-und Kommunalkreditbank AG and Wells Fargo Bank.

But facts provided by the city convinced them, they say.

The 21-page document calls CalPERS' argument that no decision about eligibility should be made until the city passes a pendency plan - which it now has - and a plan of adjustment "contrary to the purpose of Chapter 9," which is to give cities breathing room to adjust their debts.

"CalPERS request for delay is a thinly disguised effort to allow it to learn how it will be treated under the plan of adjustment before it decides whether it will wage war over eligibility," they write.

"Meanwhile, it seeks to create a cloud of uncertainty over the city's head to bully the city."

CalPERS also suggested the city should be denied bankruptcy protection because it won't be able to pay its administrative expenses and so won't be able to pass a plan of adjustment that the court would approve.

"Conclusions regarding treatment of such claims in a plan are premature at this early stage."

CalPERS spokeswoman Amy Norris said there was no update to her organization's position.

SBPEA argued the city's evidence in favor of bankruptcy was unreliable, that more could have been done to prevent bankruptcy and that bankruptcy was filed for the purpose of "war" against employees.

"Regardless of how the city became insolvent, insolvency is factually and legally undeniable: as of the petition date, the city was experiencing a General Fund cash shortfall of $18.9 million - which is expected to grow to $45 million by the end of the fiscal year - and owed more than $13.5 million in unpaid debts," they write.

The bondholders attorneys also point to personnel costs - more than total revenues and higher than comparable Southern California cities, they say - to dispute the characterization of "war."

"It is not bad faith to make severe reductions in personnel costs; rather, it would be folly to ignore them," the attorneys say.

The document was submitted by attorneys David Dubrow; Ralph Taylor, Jr.; Mette Kurth; and Mark Angelov, of Arent Fox LLP in Los Angeles.

They represent holders of three Series A bonds issued in 2005 to fund the city's obligation to CalPERS for employee pension benefits.